Pawlenty, Taxes and Budget Crises

Tim Pawlenty misled readers in an op-ed by saying he solved Minnesota's budget crisis in 2005 without raising taxes. Pawlenty's 75-cents-per-pack cigarette tax — which he called a "health impact fee" — helped forge a budget deal and end a nine-day partial government shutdown.

In a July 12 op-ed piece for the Des Moines Register, the former Minnesota governor and current Republican candidate for president criticized Democrats for proposing to raise taxes to solve budget problems in Minnesota and Washington, D.C. Instead, Pawlenty called for cutting spending and not raising taxes.

Pawlenty, July 12: At every level, governments are facing big deficits as the weak economy diminishes tax revenues at the very same time that the bill is coming due on decades of irresponsible spending increases, entitlement promises and pension promises. As I proved in Minnesota, these problems can be solved without tax increases.

It's true that Pawlenty never signed legislation as governor to raise the state income tax or other broad-based taxes. But the former governor's cigarette tax raised more than $400 million over two years and helped resolve a budget crisis that had resulted in a partial government shutdown.

In 2005, Pawlenty and Minnesota state legislators grappled with how to fund health care and education in the upcoming biennial budget for fiscal years 2006 and 2007. While Democratic lawmakers sought to raise taxes on upper-income residents, Pawlenty and Republican legislators resisted — bringing negotiations to a stalemate. Seeking to find a compromise before the mandated end of the legislative session, Pawlenty unveiled the "health impact fee" during a press conference on May 20, 2005, saying he hoped it would be a "session-ending proposal."

Here's a video of that press conference:

The proposal did not prevent a partial state government shutdown that July. But it did ultimately help lead to a budget agreement. On July 9, 2005, Pawlenty signed the budget, which included the cigarette proposal. He told the Star Tribune on July 20 that the cigarette proposal "was necessary to 'get us out of the death spiral of the [partial government] shutdown.' "

Pawlenty, who pledged not to raise taxes as governor, called his plan a "user fee" when he first introduced it, although he also acknowledged that "some people are going to say it's a tax." As predicted, not everyone agreed with the governor's terminology. On the day the Legislature passed the budget, Minnesota Public Radio quoted a Republican saying the governor was being disingenuous.

MPR, July 14, 2005: The 75-cents-a-pack cigarette tax will raise an estimated $400 million over two years. But Rep. Phil Krinkie, R-Shoreview, says calling the cigarette tax a fee is deceptive.

"I don't believe anyone in the state of Minnesota outside of the governor's office believes that a health impact fee is not a tax increase," Krinkie said.

In fact, a 2006 omnibus tax bill passed by the Legislature and signed by Pawlenty amended state statutes to describe any fees — presumably including the "health impact fee" — as taxes. It defines a tax as "any fee, charge, exaction, or assessment imposed by a governmental entity on an individual, person, entity, transaction, good, service, or other thing." Therefore, by Minnesota's legal definition, Pawlenty raised taxes — and not by an insignificant amount.

In an October 2005 analysis of the 2006-2007 budget, the Fiscal Analysis Department of the Minnesota House of Representatives estimated that the "health impact fee" would raise $401 million over two years. But it actually brought in more than that. The 75-cents-per-pack tax was in addition to two existing cigarette taxes: a 48-cents-per-pack excise tax on all cigarettes and a 35-cents-per-pack tax on cigarettes sold by companies that were not part of the tobacco settlement. In all, cigarette taxes generated $835 million in fiscal years 2006 and 2007 — $501 million more than they did in fiscal years 2004 and 2005, before the "health impact fee" was imposed.

In addition to increasing cigarette tax revenue, Pawlenty also proposed several other tax changes that were part of the final budget. Although they did not raise taxes, two of the governor's proposals did prevent tax cuts from taking effect.

The tax changes included:

A new 2.5 percent gross receipts tax on alcohol. The new tax replaced an extra 2.5 percent sales tax that was due to expire at the end of 2005.

An extension of the special 12.7 percent sales tax on rental cars. Without the extension, the sales tax on car rentals would have dropped from 12.7 percent to the standard 6.5 percent tax rate on Jan. 1, 2006.

So, it's clear that Pawlenty helped resolve the state's budget crisis in 2005 by raising taxes, despite what he says, and helped balance the budget by preventing tax cuts from taking effect.